Standard-cost household service for boarding service providers (Nov 05)
DET 05/03 (Nov 2005) establishes allowable standard-costs for private boarding services provided from domestic accommodation.
This Determination, made pursuant to section 91AA(2) of the Tax Administration Act 1994, may be cited as "Determination DET 05/03: Standard-Cost Household Service for Boarding Service Providers."
- Explanation (which does not form part of the Determination)
- This Determination establishes allowable standard-costs for a household service that has been provided as private boarding services, by providers, who are natural persons, in their domestic accommodation. The standard-costs have been determined based on current tax law and are to be used for the calculation of a boarding service provider's income tax liability, if any. They cannot and should not be used for any other purpose.
- It also describes the components of expenditure recognised as generally incurred in providing boarding services.
- This Determination establishes a figure for a cost or costs for the purpose of the Tax Administration Act 1994 and the Income Tax Act 2004 that may be treated as being incurred by a boarding service provider in deriving:
- exempt income and
- assessable income.
- This Determination also prescribes a method of calculating such a figure, as set out in paragraph (c).
- Reference
This Determination is made pursuant to section 91AA of the Tax Administration Act 1994. - Scope of Determination
Except where its application is specifically excluded in another Determination or a fresh Determination, this Determination may be used by all natural persons who provide private boarding services in their domestic accommodation.
This Determination shall not apply to situations which are the subject of any other Determination made under section 91AA, such as where persons are accommodated in domestic accommodation as an extension of any specialised health care or institutional half-way house to facilitate rehabilitation. It also does not apply where the boarding service is provided as part of a GST taxable activity of a registered person or to cases where the boarding service provider has on average five or more boarders in residence during the income year.
Subject to any adjustment based on the annual movement of the Consumers Price Index as at the end of March each year, this Determination, unless specifically withdrawn, shall apply from the 2007 income year. - Interpretation
In this Determination, unless the context otherwise requires:- expressions used have the same meanings as those in sections CW 49 and OB 1 of the Income Tax Act 2004 and section 91AA of the Tax Administration Act 1994
- "boarding service provider" means a natural person (which term shall include one or more natural persons living together in the same residence) who carries on an activity of providing a private boarding service in their domestic accommodation
- "private boarding service" means all activities in respect of accommodation and associated care including meals, laundry and utilities typically provided by a boarding service provider to other persons (boarders) in the boarding service provider's domestic accommodation, in return for payment
- "Consumers Price Index" means the application of the annual movement of the All Groups Consumers Price Index to the weekly standard-cost per boarder
- "domestic accommodation" means the dwelling which is the principal residence of any boarding service provider
- "standard-cost" in relation to any private boarding service, means the standard-cost that has been determined by the Commissioner of Inland Revenue for the purpose of this Determination, as referred to in section 91AA of the Tax Administration Act 1994.
- Standard-cost for boarding service providers: general notes
A boarding service provider who derives income from such services in an income year, may:- elect to use the standard-cost as set out in this Determination, and
- to that extent payments received from private boarding services will be exempt income.
Boarding service providers may elect to use the standard-cost method by not including the amount of income derived from providing boarding services, up to but not exceeding the determined standard-costs in aggregate in any tax return otherwise required to be furnished.
A boarding service provider who makes such an election will not be eligible to claim any net tax loss. Losses may only be claimed where the taxpayer furnishes a full return of income (showing all payments received) and claims actual expenditure, with sufficient records available to support their tax position.
That is, where a boarding service provider elects to use the determined standard-costs, they may not deduct any additional cost of providing the boarding services, if the additional cost relates to an item of standard-cost expenditure represented in this Determination. - Determination
A private boarding service shall be a standard-cost household service for the purposes of section 91AA where:- the private boarding service involves the use of the boarding service provider's domestic accommodation, and
- the private boarding service involves activities and benefits that usually or commonly occur in or are derived from a domestic ("family") household.
The standard-cost which the taxpayer may treat as incurred in deriving exempt income for the purposes of section CW 49 of the Income Tax Act 2004 consists of two elements - the weekly standard-cost per boarder and the annual capital standard-cost. It is expected however that many boarding service providers will be able to determine their tax position by referring to the weekly standard-cost, and will not need to additionally calculate the annual capital standard-cost.
(a) Weekly standard-cost per boarder
The weekly standard-cost per boarder represents the direct cost of providing private boarding services to each boarder on a weekly basis.
Weekly standard-cost for one to two boarders $200 each Weekly standard-cost for third and subsequent boarders $162 each
This component covers expenditure on items and services typically provided to boarders, such as food, laundry, cleaning, heating, power, transport, telephone rental, use of bedroom chattels, general household furniture, linen and incidentals.
Where a taxpayer elects to use this method and the weekly payments for the relevant number of boarders in any week do not exceed the standard-cost amount, the income is exempt.
(b) Annual capital standard-cost
The annual capital standard-cost element represents the cost for the use of the domestic accommodation in providing the private boarding service and includes financing and depreciation costs. This is an annual calculation for the use of the domestic accommodation, based on:- The actual cost to the boarding service provider of acquiring and making capital improvements to the domestic accommodation or renting the domestic accommodation in which the boarding services are provided
- the proportion of boarders who reside in the accommodation in relation to the overall average number of occupants, and
- the proportion of the actual period during which private boarding services are provided in an income year.
The calculation depends on whether a boarding service provider owns or rents their domestic accommodation. Additionally, the annual capital cost calculated must be reduced by the amount of any accommodation supplement received by a boarding service provider.
(i) Boarding service provider who owns their domestic accommodation
Where a boarding service provider owns their domestic accommodation, the annual capital standard-cost for any income year must be determined in accordance with the following formula:
[(a x 5%) - b] x c x d
where-a is the purchase price of the domestic accommodation plus the cost of all capital additions, and b is the annualised amount of accommodation supplement received by the boarding service provider (weekly amount received multiplied by 52 weeks), and 5% represents the typical expenditure incurred in owning a domestic property, including depreciation of the building and outgoings such as rates, insurance, mortgage interest cost, repairs and maintenance, and c is the average percentage of boarders in relation to the overall average number of occupants living in the domestic accommodation during the income year, and d is the number of full weeks during which private boarding services were provided in an income year, divided by 52.
(ii) Boarding service provider who rents their domestic accommodation
Where the boarding service provider rents their domestic accommodation, the annual capital standard-cost for any income year must be determined in accordance with the following formula:
(a - b) x c x d
where-
a is the annualised rental payment (weekly rent paid x 52 weeks), and b is the annualised amount of accommodation supplement received by the boarding service provider (weekly amount received x 52 weeks), and c is the average percentage of boarders in relation to the overall average number of occupants living in the domestic accommodation during the income year, and d is the number of full weeks during which private boarding services were provided in an income year, divided by 52.
The standard-cost for boarding service providers is calculated inclusive of GST, if any.
This Determination is made by me, acting under delegated authority from the Commissioner of Inland Revenue.
This Determination is signed on the 14th day of November 2005.
Graham Tubb
National Manager, Technical Standards
Commentary on Determination DET 05/03
This commentary and its appendices do not form part of the Determination. They are intended to provide assistance in the understanding and application of the Determination.
This Determination and this commentary also appear in Tax Information Bulletin Vol 17 No 10 (December 2005).
Standard-cost basis and actual-cost basis
- In accordance with section 91AA(3) of the Tax Administration Act 1994, a boarding service provider may use the standard-cost basis to calculate their income tax liability for the elected income year.
- A boarding service provider elects to use the standard-cost basis by treating income from private boarding services as exempt income, either in a tax return or by electing not to file a tax return, up to but not exceeding the sum of standard-cost set in this Determination, for the relevant income year.
- The boarding service provider in any one income year, must adopt either the standard-cost basis or the actual-cost basis.
- In electing to use the actual-cost basis, a boarding service provider must keep sufficient records to support their tax position.
Income tax implications and filing of tax returns
The following income tax implications apply to a boarding service provider who provides a private boarding service and elects to use the standard-cost basis set out in the Determination.
- Section DA 2(3) of the Income Tax Act 2004 prohibits any actual tax losses above the level of the standard-cost from being utilised against other income for any income year or carried forward to future income years.
- In accordance with section CW 49 of the Income Tax Act 2004, a boarding service provider would not be required to file a tax return for that income year if:
- after applying the amount of standard-cost under the Determination, and treating boarding income up to that level as exempt, the boarding service provider has zero income tax liability, and
- the boarding service provider does not have any other income where tax has not been deducted at source.
Standard-cost election
Form of election -
A boarding service provider may elect to use the standard-cost basis in calculating their income for an income year. An election is merely a decision to use either the standard-cost basis or actual-cost basis for calculating assessable income, if any, for an income year. An election does not require notice to be given to Inland Revenue of which method is used to calculate a boarding service provider's income for an income year.
Timing of election -
It is envisaged that many boarding service providers will make their election to use either the standard-cost or actual-cost basis at the beginning of an income year, as those who decide to use the actual-cost basis should prepare themselves to keep adequate records to support expenditure claimed at the end of the income year when filing a return. An election can be made at any time prior to filing a return. Should boarding service providers not provide a return of income by the due date for filing, it will be assumed they have elected to use the standard-cost option.
Consumers Price Index
To assist boarding service providers, Inland Revenue will publish the effect of the annual movement of the All Groups Consumers Price Index, as at the end of March each year, on the weekly standard-cost per boarder. The revised standard-cost component will be published in the New Zealand Gazette and in Inland Revenue's Tax Information Bulletin . This Determination uses information current as at March 2005.
The changes in the annual movement of the All Groups Consumers Price Index will not be applied to the annual capital standard-cost. This is because the basis for this component is either historical (where a boarding service provider owns their domestic accommodation) or market-related (where a boarding service provider rents their domestic accommodation).
An annual adjustment will be made as at March 2006 to the weekly standard-cost per boarder applicable for the 2007 income year.
Goods and services tax (GST)
As private boarding services are an exempt activity for GST purposes, boarding service providers will not be eligible to register for GST for this activity or claim back GST charged on goods and services consumed. Accordingly, the standard-cost components determined by the Commissioner have been prepared on a GST-inclusive basis.
Purchase price of domestic accommodation
The purchase price of a domestic accommodation will include any subsequent cost of capital improvement such as building an extension, but does not include the cost of general repairs and maintenance. Boarding service providers will be required to provide verification of capital improvements. The cost of improvements should be supported by receipts but may also be evidenced by local authority building consent applications detailing related costs, if applicable.
Current tax law allows deductions for expenditure to the extent such expenditure is incurred. Accordingly, boarding service providers are only permitted to use the purchase price and cost of capital improvements to a property; you cannot use current market or local body rateable values for the annual capital-cost calculation
Family trusts
Where a domestic property is in a family trust occupied by the beneficiaries who provide boarding services, they may only calculate the standard-cost for the annual capital component based on any rent paid. Any rent claimed will be proportional to the period of boarding services provided and further limited to the proportion of boarders compared to the average number of household occupants. The rent claim will be calculated as follows:
| annual rent paid | service period | number of boarders | ||||
| Rent claimable | = | --------------- | x | --------------- | x | ---------------- |
| 1 | 52 weeks | average household number |
International students and the code of practice
Inland Revenue has used the code of practice for the Pastoral Care of International Students as the standard to ensure a sizable group of service providers are not denied the compliance cost reduction opportunities available under the standard-cost option.
Where five or more international students are accommodated as boarders, the domestic accommodation is a boarding establishment for the purposes and relevant standards of Code of Practice. The domestic accommodation may be viewed by Inland Revenue as a commercial dwelling. For example, a building required to be registered with local authorities under sec 636 of the Local Government Act 1974 as a residential institution will be considered a commercial dwelling by Inland Revenue.
Receipt of accommodation supplement by a boarding service provider
A boarding service provider may be entitled to an accommodation supplement. The Ministry of Social Development assesses each applicant's entitlement based on a set of guidelines. The assessment of entitlement takes into account such factors as accommodation costs, income, assets, family status, employment status and residential location. Where a boarding service provider is entitled to an accommodation supplement, the annual capital standard-cost will be reduced by the annual amount of the accommodation supplement received. The examples in Appendix C illustrate how the receipt of an accommodation supplement affects the calculation of the annual capital standard-cost for the use of domestic accommodation.
Number of occupants and number of boarders
Boarding service providers will need to record the period(s) during the year when they provide boarding services and the number of occupants in their household during those periods. This will allow them to correctly apply the rules relating to the annual capital standard-cost component. The calculation will involve a degree of rounding of the number of weeks for which boarding services were provided and (where family members come and go during the year) a fair estimate of the average number of occupants during that time.
Where a child (under 18 years) accompanies a parent or guardian in a private boarding service arrangement and there is no separate charge for keep of the child, they should not be counted as an occupant for the purpose of the annual capital standard-cost calculation.
Where a boarding service provider has a shared custody arrangement for a child over five years of age, the child should not be counted as an occupant for the purpose of the annual capital standard-cost calculation if they reside with the boarding service provider for less than half of the year. The same will apply where a dependent child is absent from the household while attending boarding school or living elsewhere for more than half of the year.
Children under five years of age should not to be counted as occupants (for the purpose of the annual capital standard-cost calculation) or as boarders (for the purpose of the weekly standard-cost calculations), where they are accompanying a parent or guardian boarding in a private boarding service arrangement. Similarly, any child under five years of age of the boarding service provider should not be counted.
Family visitors and guests accommodated without charge on a short-term stay are not counted as occupants for the purpose of the standard-cost calculation or as boarders for the weekly standard-cost calculations.
Reimbursements
Reimbursements for specific additional costs are not viewed as income nor are these costs viewed as an expense incurred by the boarding service provider, eg, payment received from the boarder for telephone toll calls.
Impact on previously accepted practice
Prior to the issue of Determination DET 05/03, boarding service providers may have applied the practice as published in Tax Information Bulletin Vol 5 No 9 (February 1994).
Determination DET 05/03 supersedes any previously accepted practice, which is now withdrawn. Boarding service providers, in calculating their income tax liability, must now elect to use either the standard-cost basis (as detailed in DET 05/03) or the actual-cost basis. In adopting the actual-cost basis, boarding service providers must also ensure sufficient records are kept to support their claimed tax position.
Returning income
The standard-cost components will assist the majority of boarding service providers to readily identify if they are required to return assessable income. The flowchart and table below outline the use of the standard-cost basis. They also show the key stages when boarding service providers should give consideration to an election on whether to use the standard-cost or actual-cost basis.
| Do I have to return income? | |
|---|---|
| Step 1: | Is the average weekly charge for each boarder more than the standard-cost? $200 each for 1st or 2nd boarder, and $162 each for 3rd and subsequent boarder. |
| If yes: Part of the amounts received may be taxable income. Go to step 2. | |
| If no: Income not taxable, not required to show in a return. Losses cannot be claimed. | |
| Step 2: | Calculate the annual capital standard-cost amount - refer to Appendix C. |
| Step 3: | Are total payments received more than the sum of annualised weekly and capital standard-costs? |
| If yes: Excess amount is assessable income to be shown in return. Note: Your election to use either the standards-cost or actual-cost basis can be made at any time prior to filing a return | |
| If no: Income not taxable, not required to show in a return. Losses cannot be claimed. | |
When total payments received exceed the aggregate annualised value of weekly and capital standard-cost for the income year, boarding service providers are required to return the excess as assessable income.
Inland Revenue will accept, where there is more than one host providing boarding services, the returning of assessable income by the boarding service provider who is most directly involved on a day-to-day basis. This is to minimise compliance costs by only requiring one householder to file the return.
Where boarding service providers elect to claim expenditure on the actual-cost basis, they will be required to show all payments received as income and claim actual expenditure incurred in a return of income. In addition, they are required to keep sufficient records to support their tax position.
Standard-costs as determined
Determination DET 05/03 sets out the components of standard-costs that are likely to be incurred by boarding service providers. The standard-costs are determined based on special tax rules as provided for under current tax law. They are to be used for tax purposes only and cannot be used for any other purpose. The determined weekly standard-costs are not intended as any guide to the amounts which taxpayers can or should charge on a weekly basis, but rather reflect the maximum expenditure recognised by Inland Revenue as likely incurred by boarding service providers. Uniform weekly standard-cost rates are applied nationally to maintain simplicity and minimise tax compliance costs but it is accepted that there may be significant variations in the circumstances and amounts charged.
Should boarding service providers consider that the standard-cost components do not reflect the higher costs incurred in their situation, they may elect to use the actual-cost basis. They must keep sufficient records to support their tax position.
The variance in weekly standard-cost rates for smaller households with one to two boarders versus households with three or more boarders, acknowledge that larger households are more economical to operate when looking at costs incurred on average for each person. The weekly standard-cost rates are based on average costs, which are set on the higher end in favour of boarding service providers.
APPENDIX A
Part I WEEKLY STANDARD-COST PER BOARDER
| Average weekly standard-cost | ||
|---|---|---|
| Type of expenditure | Standard-cost for each boarder | |
| 1st and 2nd boarder | 3rd and subsequent boarder | |
| Food | 80.00 | 80.00 |
| General household items | 3.45 | 2.04 |
| Heating and power | 20.00 | 20.00 |
| Transport costs | 45.85 | 21.46 |
| Bedroom chattels & linen | 12.20 | 12.20 |
| General household chattels | 12.50 | 6.25 |
| Telephone rental | 5.00 | Nil |
| Incidentals | 15.00 | 15.00 |
| Total standard-cost per boarder per week - March 2004 | $194.00 | 156.95 |
| Adjusted in accordance with the annual movement of the All Groups Consumers Price Index for the twelve months to March 2005, which showed an increase of 2.8%. | $200.00 ($199.43 rounded up) | $162.00 ($161.34 rounded up) |
Explanation of the weekly standard-cost expenditure items
With the exception of bedroom and general household chattels, the weekly standard-cost items have been calculated based on statistical data from Statistics New Zealand. The level of costs arrived at takes into account the operation of economies of scale in relation to the size of a household.
Food - This covers the cost of food and includes such items as fruit, vegetables, meat, poultry, fish, farm products, fats, oils, cereals, sweet products, spreads, beverages, meals away from home, ready-to-eat meals and other foodstuffs.
General household items - These cover household supplies for general cleaning and laundry products, toilet paper and other similar items.
Heating and power - These cover the use of all appliances including the cost of heating, lighting, cooking and hot water. It includes other heating fuels such as gas, wood and coal.
Transport costs - These cover the costs of providing transportation to boarders using public transport and road vehicles, and include vehicle ownership expenses.
Telephone rental - This covers a 50% claim for a primary telephone rental, consistent with business use of a home phone, as published in Tax Information Bulletin Vol 5 No 12 (May 1994).
Bedroom chattels and linen - These cover the straight line depreciation of a bed, student desk and chair, carpet, drapes, portable heater, electric blanket, bed linen, bathroom linen provided for a boarder's personal use. Further details are provided in Part II of this appendix.
General household chattels - These cover the straight-line depreciation of a lounge suite, television, dining suite, dishwasher, washing machine, stove, microwave, crockery and cutlery items in general living areas used by boarders. This is further explained in Part II of this appendix.
Incidentals - These cover miscellaneous expenditure such as gifts, leisure and entertainment activities provided by service providers to boarders.
Part II STANDARD-COST FOR THE USE OF CHATTELS
Provision for wear and tear of bedroom and general household chattels is included as part of the weekly standard-cost per boarder, as detailed in Part I of this appendix.
Chattels listed are those likely to be subject to greater wear and tear due to additional use by boarders. The values of the chattels reflect product ranges likely to be found in the average home, based on their current market purchase prices.
| Standard-cost for the use of chattels Bedroom chattels and linen | |||||
|---|---|---|---|---|---|
| Category/item | Standard value | Straight-line depreciation rate | Approx. annual cost | Standard-cost Calculation | |
| Bed (single) | 500 | 12.5% | 62.50 | $634.75 divided by 52 weeks = $12.20 pw each boarder. | |
| Dresser/drawer unit | 400 | 12.5% | 50.00 | ||
| Student desk and chair | 250 | 12.5% | 31.25 | ||
| Drapes | 200 | 15.5% | 31.00 | ||
| Carpet | 500 | 24% | 120.00 | ||
| Heater (portable) | 100 | 40% | 40.00 | ||
| Electric blanket | 150 | 40% | 60.00 | ||
| Bathroom linen | 100 | 40% | 40.00 | ||
| Bed linen, blankets, covers | 500 | 40% | 200.00 | ||
| $634.75 | |||||
The weekly standard-cost for the use of general household chattels has been apportioned to 50% ($12.50 weekly for each boarder, up to two boarders) for situations where only one or two boarders are hosted, whereas the apportionment for the third and subsequent number of boarders is reduced to 25% ($6.25 weekly for the third and subsequent number of boarders). The apportioned weekly amounts are relative to the average household of three persons (2001 census).
| Standard-cost for the use of chattels General household chattels | |||||
|---|---|---|---|---|---|
| Category/item | Standard value | Straight-line depreciation rate | Approx. annual cost | Standard-cost Calculation | |
| Dining suite | 1,500 | 12.5% | 187.50 | Rounded up to $1,300 = $12.50 pw each for the first two boarders and reduced to $6.25 pw for the third and subsequent number of boarders.
| |
| Lounge suite | 3,000 | 12.5% | 375.00 | ||
| Stove | 1,200 | 15.5% | 186.00 | ||
| Microwave oven | 300 | 18% | 54.00 | ||
| Washing machine | 1,000 | 18% | 180.00 | ||
| Television | 700 | 24% | 168.00 | ||
| Crockery | 200 | 40% | 80.00 | ||
| Cutlery | 100 | 40% | 40.00 | ||
| $1,270.50 | |||||
APPENDIX B
EXAMPLES OF THE APPLICATION OF WEEKLY STANDARD-COST FOR BOARDING SERVICE PROVIDERS
Example B1
A boarding service provider owns a domestic property, which costs $200,000. The boarding service provider receives an accommodation supplement of $10 per week based on the location of the domestic property and their individual circumstances. One boarder pays $180 per week for accommodation over a full year. There are no other private boarders.
The boarding service provider elected to use the standard-cost basis in accordance with this Determination. As the weekly service payment received is less than the determined weekly standard-cost per boarder of $200, they are not required to return the income.
Example B2
A boarding service provider rents a domestic property for $300 per week. The boarding service provider receives an accommodation supplement of $20 per week based on the location of the domestic accommodation and their individual circumstances. One boarder pays $180 per week for accommodation over a full year. There are no other private boarders.
The boarding service provider elected to use the standard-cost basis in accordance with this Determination. As the weekly service payment received is less than the determined weekly standard-cost per boarder of $200, they are not required to return the income.
Example B3
Sharon lives at home and pays her parents $120 per week for board. There are no other private boarders. As the payment for board is less than the weekly standard-cost per boarder of $200, it will be exempt income and no tax liability arises for her mother for boarding service provided.
APPENDIX C
EXAMPLES OF THE APPLICATION OF THE WEEKLY STANDARD-COST AND ANNUAL CAPITAL STANDARD-COST FOR BOARDING SERVICE PROVIDERS
(Note: All the calculations are rounded to the nearest dollar)
Example C1
A boarding service provider owns a domestic property. The purchase price of the domestic property is $200,000. The boarding service provider receives an accommodation supplement of $10 per week based on the location of the domestic property and their individual circumstances. One boarder is accommodated for $250 per week for a full year, in a household of four occupants (including the boarder). As the weekly rental exceeds the standard-cost, it is necessary to also calculate the annual capital cost component. The annual capital standard-cost per annum is:
| [($200,000 x 5%) - ($10 x 52)] x 25% x 52/52 = $2,370 |
Example C2
A boarding service provider rents a domestic property. The rent is $200 per week. The boarding service provider receives an accommodation supplement of $20 per week based on the location of the domestic accommodation and their individual circumstances. One boarder is accommodated for a full year for $250 per week, in a household of four occupants (including the boarder). The annual capital standard-cost per annum is:
| [($200 x 52) - ($20 x 52)] x 25% x 52/52 = $2,340 |
Example C3
A boarding service provider owns a domestic property that was purchased 20 years ago for $120,000. They do not receive an accommodation supplement. Two boarders are accommodated for the same period of six months (26 weeks) during the year, in a household of four occupants (including the two boarders). Both boarders each pay $250 weekly for the services provided.
The boarding service provider elected to use the standard-cost basis. As the weekly service payments received are greater than the weekly standard-cost figure of $200 for each boarder, it is necessary to calculate the annual capital standard-cost component to establish if assessable income should be returned.
The boarding service provider's income tax liability is calculated as follows:
| Income ($250 x 26 x 2) | $13,000 |
| Less: Weekly standard-cost ($200 x 26 x 2) | $10,400 |
| ---------------- | |
| $2,600 | |
| Less: Annual capital standard-cost [($120,000 x 5%) - $0] x 50%; x 26/52 | $1,500 |
| ---------------- | |
| Income to be returned | $1,100 |
Example C4
A boarding service provider owns a domestic property, which cost $275,000. They do not receive an accommodation supplement. Three boarders live in the household at different periods of the year. One permanent boarder pays $200 per week over 12 months and two boarders each pay $250 per week for six months (26 weeks) in the second half of the year. The overall household of three occupants (including the permanent boarder) increases to five occupants in the latter half of the year.
The boarding service provider's income tax liability is calculated as follows:
| Income ($250 x 26 x 2) = $13,000 ($200 x 52 x 1) = 10,400 | $23,400.00 |
| Less: Weekly standard-cost ($200 x 52) permanent boarder $10,400 ($200 x 26) second boarder 5,200 ($162 x 26) for third boarder 4,212 | $19,812.00 |
| ---------------- | |
| $3,588.00 | |
| Less: Annual capital standard-cost [($275,000 x 5%) - 0] x 33% x 26/52 = $2,268.75 [($275,000 x 5%) - 0] x 60% x 26/52 = $4,125.00 | $6,393.75 |
| ---------------- | |
| ($2,805.75) | |
| ---------------- | |
| Income to be returned | Nil |
| Note that the apparent tax loss based on this calculation is not deductible against other income of the taxpayer or carried forward to future years. | |
Example C5
John provides boarding services to Joan and her four-year old son. John's partner and their two children each under five years old also occupy the household. As the three children are under five years, they are not counted as occupants for the purpose of the standard-cost calculation. John and his partner purchased their home for $150,000 ten years ago. No accommodation supplement is received.
In this situation, one boarder pays $240 per week for accommodation over a full year, in an overall household treated as consisting of three occupants (including the boarder). As the weekly service payment received is greater than the determined weekly standard-cost figure of $200, John will need to calculate the annual capital standard-cost component to establish if he or his partner is required to return income.
The boarding service provider's income tax liability is calculated as follows:
| Income ($240 x 52) | $12,480 |
| Less: Weekly standard-cost ($200 x 52) | $10,400 |
| ---------------- | |
| $2,080 | |
| Less: Annual capital standard-cost [($150,000 x 5%) - 0] x 33% x 52/52 | $2,475 |
| ---------------- | |
| ($395) | |
| ---------------- | |
| Income to be returned | Nil |
| Note that the apparent tax loss based on this calculation is not deductible against other income of the taxpayer or carried forward to future years. | |
Example C6
Rosanne purchased a home for $400,000 and had two groups of four students boarding with her between January to June (23 weeks), and July to December (23 weeks). Each boarder was charged $280 weekly during their stay.
The boarding service provider's income tax liability is calculated as follows:
| Income ($280 x 23 x 4 x 2) | $51,520 |
| Less: Weekly standard-cost ($200 x 23 x 2 x 2) = $18,400 ($162 x 23 x 2 x 2) = $14,904 | $33,304 |
| ---------------- | |
| $18,216 | |
| Less: Annual capital standard-cost [($400,000 x 5%) - 0] x 80% x 46/52 | $14,154 |
| ---------------- | |
| Income to be returned | $4,062 |
| Note: If Rosanne's tax to pay is $2,500 or more, she will also have to pay provisional tax for the following year. | |
Example C7
A not-for-profit organisation purchases a motel and employs a manager to provide care for forty students, occupying the motel units as boarders. The manager lives on site and arranges for meals to be delivered to the students in his care. The use of the motel to provide boarding services for the students has been approved by the local council as a residential institution. The manager enquires whether the Determination can be applied to the above situation.
The Determination is not available to the boarding service provider, for the reasons below:
- The not-for-profit organisation is not a natural person
- The residential establishment does not fit within the scope of a domestic dwelling.
The activity run by the not-for-profit organisation will likely be viewed by Inland Revenue as a commercial boarding house. All payments should be returned as income and allowable expenditure claimed, with sufficient records to support the tax position. If total payments received for the boarding services exceed $40,000 for any twelve month period, the service provider will also be required to register for GST purposes.